Interest Rates Widen Piedmont Office REIT's Losses Despite Improved Leasing

One of Atlanta's largest office owners took a more than $27M loss in the first quarter and expects to nearly double that loss by the end of the year, as higher interest rates put pressure on its balance sheet. 

Piedmont Office Realty Trust posted a net loss of $27.7M in the first three months of the year, a substantial jump from the $1.4M loss it posted a year prior. Piedmont’s core funds from operation also dwindled in the first quarter, shrinking from $56.3M to $47.7M year-over-year. 

In Piedmont’s guidance for 2024, the firm said it expects to report a net loss of between $41M and $47M, in part due to interest expenses of between $119M and $121M from higher rates on loans refinanced during 2023 and 2024, according to its earnings report. 

Its interest expenses rose from $22M in Q1 2023 to $29.7M last quarter.

Commercial real estate has taken a beating since the Federal Reserve hiked the interest rate 11 times between March 2022 and July 2023 to combat inflation. Hopes are quickly being dashed that the Fed will begin cutting rates, as inflation has been stickier than expected and there is some concern that its next move will be a rate increase.

Piedmont owns 16M SF in mainly Sun Belt markets, including 4.7M SF in Metro Atlanta, placing it among the five office owners with the largest portfolios in the region.

The REIT reported strong leasing activity in Q1, inking 500K SF, including 328K SF of new tenants, with rents rising 8% on space that had been empty for a year or less.

Piedmont also reported it had 1.3M SF of executed leases that had yet to start paying rent, totaling $42M in additional rental revenues. Its buildings were 87.8% leased at the end of the first quarter, up from 87.1% at the end of 2023.

Piedmont also refinanced a substantial chunk of its existing debt this past quarter. The Atlanta-based REIT entered into a new three-year, $200M unsecured syndicated bank term loan, using the proceeds and capital from a revolving line of credit to pay off a $100M bank loan maturing in December, and repaid $190M of a $215M loan that was set to mature this past January. The remaining $25M was extended to the end of January 2025.

Piedmont also sold the 10-story One Lincoln Park office building in Dallas for $54M in an all-cash transaction to Triumph Financial, which plans to use it as its headquarters.

The sale of One Lincoln helped Piedmont pay off a $50M senior unsecured note that was coming due, the company reported. While the moves helped push off any major maturities until 2027, Piedmont CEO Brent Smith said the company would continue to use proceeds from asset sales to deleverage its portfolio. 

And with up to another $60M in asset sales expected this year, Piedmont plans to continue to reduce its debt load, Executive Vice President Christopher Kollme said during the company's earnings call Wednesday morning. 

“With regard to the capital markets, transaction activity remains at all-time lows, but pricing is starting to firm as deals occur,” Smith said on the call. “With demonstrated access to the public debt markets, we will continue to seek out attractive sources of capital to strengthen our balance sheet and lower our cost of funds.”

Piedmont wasn't the only office REIT with large Atlanta holdings to signal that the city's office market is on the road to recovery.

Cousins Properties, Atlanta’s largest office landlord, signed 229K SF in Q1, including the renewal and expansion of Workday at its Buckhead office from 57K SF to 113K SF, as well as a 23K SF expansion with Deloitte at Promenade Tower in Midtown, Cousins Executive Vice President Richard Hickson said on the firm's April earnings call. 

“Atlanta has been a great outperformer for us for a while now, as you know, and it continues to be really solid,” Hickson said. 

Highwoods Properties Chief Operating Officer Brian Leary said the REIT, which owns the third most offices in Atlanta, signed 199K SF of leases in the market in Q1, 160K SF of which was in new leases.

“This represents the greatest share of new leasing across the portfolio,” Leary said during an April 24 earnings call.

Executives with all three companies told analysts that office tenants continue to gravitate toward amenity-rich office buildings to help with their return-to-office efforts, especially among smaller and midsized firms, which tend to be expanding their office footprints.

“After a little bit of a pause during the last 12 to 24 months, we're starting to see that rebound,” Cousins CEO Colin Connolly said.